Germany is bracing for its toughest challenge since World War II as it struggles with a misfiring economy, rising inflation, and a looming pensions crisis. Chancellor-in-waiting Friedrich Merz will inherit a daunting task of balancing the nation’s books and tackling a growing debt burden.
The country’s economic woes have been exacerbated by hyperinflation in the 1920s, which wiped out savings and rendered the currency worthless. Germany’s fiscal discipline has also made it notorious for lecturing EU allies on responsible spending. However, with its own economy shrinking and inflation at a half-century high, Berlin is under pressure to rethink its approach.
The German industry has been hit hard by the loss of cheap Russian gas and a decline in exports to China. The prospect of US tariffs imposed by Donald Trump adds to the woes. With an ageing population, Germany faces a pensions crisis that will require significant spending, estimated at £105 billion annually, which is expected to almost double by 2050.
To address these challenges, Chancellor Merz will need to reform a pension system pegged to wage inflation, a task deemed politically explosive. He must also allocate funds for defence to deter Russia and meet US demands. Germany’s military budget has been boosted by €100 billion since the Ukraine invasion, but progress has been slow, and inflation has eroded the fund.
As the country faces its toughest fiscal challenge in decades, Merz will need to navigate a complex web of public spending, debt rules, and EU regulations to get Germany back on track.
Source: https://www.telegraph.co.uk/world-news/2025/02/23/germany-becoming-france-new-chancellor-economic-crisis